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welcome to the third webinar of whisper
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work on initiative on financial policy
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and regulation
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today we are happy to have Josh Macy
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from the University of Chicago he's
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going to talk about Market power and
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Financial Risk in U.S payment systems
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um whisper is a new initiative that is
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at the intersection of Law and finance
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and part of our activities is to
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organize webinars based on white papers
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on issues at the frontier of interest of
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financial policy and we're very happy to
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have Josh I'll turn it over to Peter my
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co-director to introduce Josh
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thanks so much uh what did the light
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have with us Professor Josh Macy uh Josh
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has a an unusual set of uh uh
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talents and expertise he's really the
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Liam Neeson of uh the Academy I spent
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his life developing an unusual set of
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skills which has come into use on on
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questions at the intersection of
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infrastructure uh Finance distress with
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a particular focus in energy markets and
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in our case today the payment system uh
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his his expertise unusual though it is
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becomes incredibly relevant when we're
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talking about questions of stability and
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structure and so we are today this
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stability we're talking about is
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financial stability the structures we're
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talking about are payment systems or uh
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in the plural as Josh will explain and
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the questions he seeks to resolve are
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what Josh has described in other context
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is a kind of regulatory dilemma how to
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optimize within a set of constraints
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where the constraints are not only
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constrained by resources but are
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constrained bilaterally through a
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trade-off Josh I'm going to turn it over
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to you to give a presentation
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to elucidate some of the the structural
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questions uh and and trade-offs between
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stability and concentration in the
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payment system or in the payment systems
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and then we'll take questions from the
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audience
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as many as as we can get to uh that etai
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and I and ETA and I will pose our own
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questions and pull in those questions
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from the audience and have what we hope
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will be a lively conversation so with
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that Josh take it away
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uh thanks Peter I'm really happy to be
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here uh and and really happy people want
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to want to hear a little bit about uh my
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thoughts on financial infrastructure and
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payments so
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um this paper this this what I'm working
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on reflects some ideas I've been having
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uh many with uh some in a project I'm
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working on with Dan re and Jeff Yang and
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some in a project I'm hopefully working
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on with you
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um about uh uh uh
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how sort of financial infrastructure and
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especially so so there's a
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move in the legal Academy to think about
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utilities as a coherent
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um entity that Financial utilities share
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some uh basic economic features their
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networks their platforms their economies
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of scale and uh one of the themes of my
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work is that um different utilities look
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different in different contexts either
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because the institutional regime that
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underlies a particular utility creates
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unique economic challenges and this is
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what I'm thinking about here is an
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example of that so uh
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I'm thinking about many of the
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trade-offs between economies of scale
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that are arguable and network effects
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that are arguably needed to provide a
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quality payment system competition that
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is arguably needed to promote access and
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spur Co SP for Innovation and uh
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Financial stability and the way these
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things interact with each other so in my
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opinion you want three different things
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in a payment system the first one is
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stability uh payment systems are vital
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infrastructure they're like roads or
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Bridges or the internet or transmission
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lines or whatever infrastructure you
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think that's necessary to operate a
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modern economy
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um in the payments context there are two
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types of stability that seem to me to be
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important one is the first one is
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technological you actually want the
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system to work uh the participants that
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maintain and operate a payment system
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have to provide a safe secure and
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reliable way of transferring money or
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other Financial assets the other one
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still within the the stability part is
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uh Financial stability you want a
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payment system to be resilient such that
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it remains both liquid and solvent in
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the face of idiosyncratic and systemic
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threats to its micro-prudential safety
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and soundness so the second big goal in
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that we have in payment systems is
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investment and this too I think of as
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having uh two meanings you want
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investment in day-to-day processes that
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are that that allow you to maintain
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whatever infrastructure is needed to
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maintain a reliable and convenient
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payment system and then you want
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Innovation uh you want a payment system
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you want Market participants or
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financial intermediaries to invest in
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new technologies and services to improve
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the quality of services that they
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provide and then the third and this is
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the one I've had the hardest time in my
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own mind articulating is sort of related
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to access us but it's really related to
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competition and Market power issues and
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you want a payment system uh so and then
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here too there are a couple different
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meanings but you want different
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Financial intermediaries to be able to
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connect to the payment system you can
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think of this as a horizontal Market
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power issue that if you if a certain
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subset of financial institutions
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controls access to the famous system
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they may be able to charge different
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types of horizontal taxes to those that
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are excluded
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um
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and and this can come in the form of
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sort of obvious
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um price increase sort of uh uh just
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transaction fees such as we see in
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foreign exchange markets or it may
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arguably occur in the form of taking
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advantage of the float if that occurs in
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the in in in uh in delays
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um and the second part really of access
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is I think the ordinary way we think of
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it which is that you want the
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intermediaries that are already
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connected to the system to provide
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access to customers so that and so this
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is what sort of when we think about
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ideas of financial inclusion I think the
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ideas you want
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um the payment system to be widely
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accessible to people so if we have you
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know concerns that underbanked are don't
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have access to the payment system are
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related to this and I'm increasingly
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concerned I guess that it is difficult
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to achieve all of these goals at the
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same time uh at least with respect to
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purely private or predominantly private
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systems and that this gives rise to hard
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and potentially intractable trade-offs
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for policy makers so if you consider the
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trade-off between Financial stability
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and investment to ensure Financial
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stability you need a variety of familiar
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regulatory interventions to protect
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Financial intermediaries against
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microprudential risks this typically
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involves establishing a a legally
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defined regulatory perimeter
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that limits the which entities are given
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access and then subjecting those
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intermediaries to burdensome often well
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Justified but still burdensome
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Prudential regulation
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um you know to further promote
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micro-prudential safety and soundness
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financial intermediaries are provided
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with access to Central Bank emergency
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lending facilities and other forms of
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State support that arguably give the
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entities within the closed system an
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advantage compared to potential
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competitors
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um
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and then related challenges here are
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that uh Payment Systems must manage uh
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other risks such as anti-money
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laundering compliance and so the the
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combination of closed access and these
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burdensome even if well-justified
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regulations
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um as well as state support uh can
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create potentially insurmountable
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barriers to new entry
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um where these barriers insulate
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incumbent Financial intermediaries from
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competition the effect can be to sort of
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um
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weaken incentives to make technological
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and other Investments that are needed to
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build maintain and upgrade the payments
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infrastructure to which uh those
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intermediaries enjoy exclusive access uh
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when you combine that with significant
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economies of scale and large Network
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effects that incumbent uh enjoy these
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barriers can further undercut incentives
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of new interests to invest in the
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development and new and and potentially
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more efficient systems
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so the second trade-off is between
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network access and stability
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um because of the barriers to entry I I
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just mentioned a real competitor will
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probably come from outside of the
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existing regulatory perimeter
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um we've seen this already uh you know
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and this could be because customers
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leave funds in our retail provider such
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as venmo or PayPal that can sort of come
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in and challenge an incumbent or it
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could be because people flock to a
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certain stable coin or it could be
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because a large company perhaps a social
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media company that already has a larger
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network is able to enter the payment
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space
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um but without a well-defined regulatory
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perimeter and strong Prudential
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regulation I I sort of worry that new
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entrants
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um will be free to enter and compete in
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the marketplace so these entrants may be
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at a competitive disadvantage and they
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operate without the financial safeguards
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we think of as important for the the
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system
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um in the short run this can have a
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couple different effects that might be
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hard to predict it could spur investment
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but over the long term I think you can
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still expect pronounced economies of
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scale and network effects to lead to a
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natural monopoly
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um and so even if if we do see
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meaningful competition I think uh at
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least I would expect a new equilibrium
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in which the market is dominated by a
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small number of of large networks
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um and then the if if this these new
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networks uh don't have strong Prudential
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regulation any correlated failures could
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potentially uh themselves become a
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threat to financial stability so to the
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extent we're comfortable allowing new
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entry
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um either where we have to extend the
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bank regulatory perimeter or or we have
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to
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um uh
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accepted that uh
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Finance systemic risks that we're not
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currently sort of comfortable with and
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obviously this is quite evident in the
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emerging crypto system and so the third
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and final trade-off I think is between
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network access and investment
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um
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in the presence of a well-defined
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regulatory perimeter and a strong
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credential regulation uh policy makers
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can subsidize investment in payment
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infrastructure but if you successfully
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subsidize in this way
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um policy makers have to make a choice
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about what types of access and
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investment they want to promote
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um if policy makers want to promote
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private investment
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um that suggests they should tightly
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control access giving rise to these
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Market power concerns
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um
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uh and so if you to the extent you close
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access uh
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you are a source of a of a subsidy that
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further increases the advantages to
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incumbents and a arguably a mechanism by
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which policy makers uh are able to
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Target and enforce uh Network
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improvements
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um if policy makers promote Open Access
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I think this requires direct public
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investment and payment infrastructure
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um and so here uh Open Access can lead
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to Market fragmentation and you might be
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concerned about potential under
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investment so to sort of just quickly
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say a few closing thoughts I think
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um
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it's quite common to complain about uh
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you know how slow American and uh
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Payment Systems around the world are how
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problems to access our problematic
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um in the cross-border context payments
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are both slow and they're they're the
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transaction fees are large and I think
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that you it's possible to think of these
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different problems and that that we
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always talk about in payment systems as
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consistent with the underlying issues I
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just described so we frequently see
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little innovation in payment systems
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that seems consistent with a market in
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which dominant platforms are confident
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that they already enjoy a big head start
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they have a big Network they're barriers
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to creating a new network people may be
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reluctant to use a payment system that
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does not receive financial support from
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Regulators so why would the platform
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investor innovate when it already
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controls the entire market and it's
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confident that new entrants are at a
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severe disadvantage we also have seen
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that financial institutions charge High
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overdrafts fees and otherwise make large
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profits off of the underbanked that too
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seems consistent with um
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some Market power issues and the same
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thing can is arguably occurring in the
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cross-border context so in a in a very
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little literal sense
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um I hate it when people throw around
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the word trilemma uh inaccurately I'm
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like 80 sure this is accurate uh but I
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think this gives rise to some form of a
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trilemma because if you are a regulator
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and you're not an either you know fed
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now and and different uh in a
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public options are delayed either
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because of the lack of a will or
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political pushback or incompetence A
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Better Private system involves either
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Regulators choosing to one in trench
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Bank Market power if they want the
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existing system to work they exacerbate
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these differences uh two accept a new
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source of systemic risk if they don't if
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they are are comfortable with
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competition they have to
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the possibility that Facebook
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develops a payment system means uh
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possibly expanding the bank regulatory
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perimeter in case something goes wrong
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there and third and finally
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um
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uh
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countenancing the fact that they're that
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that if you don't want to expand the
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bank regulatory perimeter upstarts could
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be a source of of of of risk we should
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be concerned about
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very good thanks uh Josh so generative
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and offer so many questions one of the
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things that we try to do in whisper in
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in intervening in policy debates is at
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least sketch a path for what a policy
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response would be and I think in your
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paper you've just told us uh
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everything's on fire everything is
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terrible there's no real clear way to uh
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get us through tell me why I'm wrong
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about that if it were a true uh trilemma
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or even to resist as you appropriately
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do that framing we might be looking at
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an optimization function that has some
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sort of equilibrium that might tell us
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that we are at that equilibrium and let
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me to bring it to to kind of uh where
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um the rubber hits the road let me
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describe what I see to be that
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equilibrium and you tell me whether or
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not you agree with it and if you don't
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what the policy response should be to
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notice toward a different place on that
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optimized Frontier the way that I see it
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is that payments uh domestically are
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dominated by some very large rails and
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resist the terms you know oligopoly
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because they look pretty different so
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one is ACH
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overwhelmingly used it has a
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public-private or origin story but is
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now uh largely private fed wire a public
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rail overwhelmingly dominates on uh on
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dollar values and then of course we have
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the card rails uh Visa Mastercard and an
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American Express private
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um and and these are these kinds of
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incumbents are real issues that have
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been raised about all of them about both
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Financial stability and concentration
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that's kind of where we are today but at
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the same time we have things and I know
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that you and Dan already have written
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about this we have things like plaid
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coming in and and saying we want to have
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a using open Banking and a lot of
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different
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um uh uh approaches to uh to uh
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generating new opportunities for fintech
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entrance so far we're not seeing a lot
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of instability there we have huge
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efforts in the crypto space to say we're
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going to try something brand new outside
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of a banking or payments uh regulatory
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perimeter uh and so the future is uh is
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not yet here we're inventing it day by
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day and so we have this equilibrium
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where we're dominated by some very large
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incumbents both public and private and
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then we also have a pretty big fervor at
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the periphery saying let's innovate here
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and we're not seeing the instability
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that you're talking about yet so so it
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seems to me one case could be made is
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that we actually kind of fixed most of
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the problems that you're describing
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um it's a pretty vibrant place in turn
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from as far as Innovation is concerned
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and that um the incumbents are going to
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continue because of pressure from the
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periphery to either acquire their
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competitors beat them uh or lose and
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become dinosaurs to so many previous
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incumbents have done so yeah what is
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wrong about what I just described so I
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don't think that much is wrong but let
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me ask a quick follow-up question and
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I'll provide hopefully an answer when
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you say
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um is the Innovation you're talking
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about is
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I understand it it's happening
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sort of half of it can be understood at
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the retail level which may be pushing
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and half of it is occurring
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um as the as as banks that
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as firms that are are powerful at the
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wholesale level
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um have said we're going to to to
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improve the inner bank system and and
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have at least made some efforts to do
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that sorry is are those the two domains
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you're primarily yeah I would say I
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would say where the Innovation seemed to
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be coming right now are much less
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wholesale or much less retail uh venmo
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possibly accepted and much more retail
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Plumbing of the system business to
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business interbank but otherwise too so
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thinking about you know we pay which
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isn't really interbank as much as it is
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um built on on a commercial
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infrastructure rather than a banking one
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yeah so so put retail to the side I
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think that's the real Innovations are
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happening behind in places where where
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folks on the street simply won't won't
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see so
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I
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I hope I didn't say uh or or I give the
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impression that I think everything is
00:19:02
Doom and Gloom and that it's impossible
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to improve on any of these metrics but
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um
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so so
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in my mind I think that
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the core takeaway for me of of or the
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the benefit of this framework is
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understanding in my mind that the
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importance of public pressure in some
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form
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um because I think that
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um and I want to push back a little bit
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on whether the reforms we're seeing are
00:19:33
quite as as uh uh uh great as as you
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implied but at a high level I think that
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the sort of my primary takeaway of
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thinking about these various dilemmas is
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that some amount of Federal Reserve in
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the U.S and Central Bank involvement is
00:19:50
very very important and this is I I see
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how was a question which I think we can
00:19:54
uh I'll try to get to after this one um
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that's really interesting
00:19:59
um but
00:20:01
there's been Even If the Fed hasn't
00:20:04
moved towards uh uh you know a central
00:20:07
bank digital currency or fed now as
00:20:09
quickly as some people would like I
00:20:11
think that the wholesale system is
00:20:14
facing pressure and the
00:20:17
uh uh zealousness with which they've
00:20:20
pushed against that could imply that and
00:20:22
this is something you've written about
00:20:23
the threat of competition from the
00:20:25
government is itself I think important
00:20:27
in this context
00:20:29
um I am not quite as optimistic that
00:20:32
we'll get rid of the market power issues
00:20:34
in the sort of new whole Bank dot uh
00:20:37
wholesale system
00:20:38
um but but I I suppose we'll just sort
00:20:41
of have to have to wait
00:20:42
um uh I know
00:20:44
um I I suspect people on this call have
00:20:47
thought about that as much as I have but
00:20:49
um
00:20:50
uh I don't I mean it seems to me that
00:20:54
what you are saying is that they're
00:20:55
different sort of
00:20:56
one-off policy interventions that have
00:21:00
facilitated investment and Innovation uh
00:21:03
despite the fact that these economic
00:21:06
issues exist and to the extent that's
00:21:07
happening I agree
00:21:09
um to the extent uh
00:21:12
uh uh
00:21:16
um and then I don't
00:21:17
know in the cross-border context if if
00:21:21
if anything that you said uh uh uh just
00:21:24
because I haven't
00:21:25
um I still think we're seeing very large
00:21:27
you know arguably this this trilemma is
00:21:30
most pertinent in the cross-border
00:21:32
context where there's the least ability
00:21:34
of central banks to to Spur uh to to
00:21:37
oversee uh the kind of thing we're
00:21:39
talking about but um I guess that's a
00:21:42
longer way than I intended of saying I
00:21:44
don't know that we're disagreeing but I
00:21:46
didn't
00:21:46
take let me uh
00:21:49
follow up on that first of all let me
00:21:51
remind people in the audience that you
00:21:54
can submit questions in Q a we already
00:21:56
have a couple of questions and we'll get
00:21:58
to them in in a few minutes
00:22:02
um before that let me just ask a
00:22:03
follow-up question to what Peter was
00:22:05
discussing so so it's very interesting
00:22:07
how you lay out this trilemma and we are
00:22:11
used to thinking about dry lemmas in
00:22:12
other areas and as you mentioned it's
00:22:16
always tempting to go back to that kind
00:22:18
of framework uh and I think you describe
00:22:21
the trade-off and some of them are
00:22:23
familiar for example thinking about the
00:22:25
trade-off between stability and
00:22:28
competition uh well would you like the
00:22:32
payment system to end up what is kind of
00:22:35
the optimal point so if you think about
00:22:37
a triangle what do you think is the is
00:22:39
the optimal point and and where
00:22:42
where do you see such a system
00:22:43
implemented uh either around the world
00:22:46
or in the past or what what what do you
00:22:48
think we should try yeah
00:22:51
um I think I don't think we should allow
00:22:55
I I think we we my preference would be
00:22:59
for
00:23:00
the regulatory perimeter to apply to the
00:23:03
payment system so as a threshold my own
00:23:05
view is we should not to the extent a
00:23:07
new payment system emerges it should not
00:23:09
be one operated by entities that are not
00:23:12
subject to Prudential regulations that
00:23:14
don't have access to to to
00:23:17
um you know Central Bank lending and so
00:23:20
I think I think I I this this I think is
00:23:24
actually closely related to Peter's
00:23:26
question where I I
00:23:27
think that we should not think assume
00:23:30
that an oligopoly is the wrong form of
00:23:32
Market structure but that
00:23:35
um uh either a public option which the
00:23:38
US has in many respects today uh but one
00:23:42
that that
00:23:44
um or aggressive oversight to prevent
00:23:47
Market power abuses is helpful and so I
00:23:50
think
00:23:51
um
00:23:52
uh
00:23:53
so I I don't know that I think the
00:23:56
current system is is
00:23:59
um completely horrible just as much as I
00:24:01
think that it creates opportunities to
00:24:03
impose taxes on smaller firms on
00:24:06
underbanked and uh that can either be
00:24:10
fixed by a
00:24:11
meaningful public option that occurs in
00:24:14
a larger percentage of the payment space
00:24:16
or it can occur by more zealous
00:24:18
supervision
00:24:19
um and so those are the two and this
00:24:21
gets to
00:24:23
um you know I think Howell's question is
00:24:24
is
00:24:25
related to this because so Howell asked
00:24:28
um does the framework apply outside the
00:24:30
U.S to countries like Brazil or India uh
00:24:34
where you've seen Innovation either with
00:24:37
government support but sometimes with
00:24:38
private Innovation and as I understand
00:24:40
it
00:24:42
um
00:24:43
and and how you should correct me if I'm
00:24:45
wrong in both Brazil and China we saw
00:24:48
massive amounts of government support
00:24:50
and it's in Kenya that we saw
00:24:53
tremendous innovation in the absence of
00:24:55
government support and I my sort of
00:24:58
off-the-cuff reaction to that is that in
00:25:01
Kenya there was a huge appetite for
00:25:03
better services and so people did it in
00:25:06
the fintech space but I don't know that
00:25:09
that under that sort of uh reduces the
00:25:12
the the need for government support I
00:25:14
sort of take all of those I so I would
00:25:17
respond to that by saying I think and
00:25:19
this is this this relates to etai's
00:25:20
question
00:25:22
um
00:25:22
I have concerns that there are
00:25:24
possibilities for Market power abuses in
00:25:26
the payment system
00:25:27
especially in the cross-border system
00:25:30
that there are certain areas where
00:25:32
there's little government supervision
00:25:34
Beyond prudent and at least in the
00:25:36
market power context and so I'd like a
00:25:39
positive sort of uh aggressive
00:25:42
investment in public options and and
00:25:44
supervision that when Financial
00:25:46
Regulators are looking at payments they
00:25:48
don't simply look at the safety side but
00:25:50
they also look at the market power side
00:25:52
which I think
00:25:53
as far as I'm aware has not been the
00:25:55
focus of uh most Financial Regulators
00:25:58
involved in payments
00:26:01
just to clarify uh the question that
00:26:04
Josh was referring to is from Howard
00:26:05
Jackson because the audience is not
00:26:08
seeing the Q a and the question was uh
00:26:11
can you say anything about how your
00:26:13
framework applies to other countries
00:26:14
like Brazil or India or China or Kenya
00:26:17
or even the EU member states all of
00:26:19
which have seen payment Innovation
00:26:21
sometimes with government support but
00:26:23
sometimes with private innovation
00:26:26
sorry about that I'll read the question
00:26:27
from yeah and we can we can pose them to
00:26:30
you Josh too so you don't have to worry
00:26:31
about it you are uh you're our guest so
00:26:33
we'll uh um we'll put them put these
00:26:36
pictures to you and you can you can
00:26:37
swing at them let me ask we have another
00:26:39
great question from Anna galpern coming
00:26:41
up in a minute and encourage all the
00:26:43
rest to pose any questions that you have
00:26:45
uh let me ask another question first and
00:26:47
then we'll get to Anna's question
00:26:50
um Josh how does this framework that
00:26:53
you've developed and I I think the the
00:26:55
place where it's most powerful is in
00:26:57
putting in direct conversation this
00:26:59
question of concentration and stability
00:27:03
a give and get uh from uh from
00:27:07
infrastructure concentration
00:27:09
and if we were to think about about
00:27:11
payments infrastructure as as
00:27:14
Public Utilities
00:27:16
or even as utilities and think about it
00:27:19
in that lens as many people have
00:27:20
encouraged us to do
00:27:22
then our thinking looks just a lot
00:27:24
different than the public-private Divide
00:27:26
looks looks very different they're
00:27:28
private corporations have shareholders
00:27:29
in some sense
00:27:31
um but but really the the regulatory
00:27:33
schematic is so so dominant so
00:27:35
overwhelming and they don't you don't
00:27:37
really think of it as free enterprise
00:27:38
the the regulation is on on rates and on
00:27:41
ways that uh conversations can even
00:27:44
occur it's just a highly choreographed
00:27:46
set of Institutions but we don't have
00:27:49
that in payments we do have
00:27:50
concentration in some aspects of some
00:27:54
user bases but in other ways and crypto
00:27:57
of course is a great example of it but
00:27:59
it's not only the only example it's sort
00:28:01
of a wild and wonky world out there so
00:28:04
so I I guess I have I have two questions
00:28:06
we can build them out over the rest of
00:28:08
our of the half hour that uh that we
00:28:11
have because let me start with this this
00:28:13
first one given how much the payments
00:28:17
World shifts right even in the last
00:28:19
decades the ways that we Internet
00:28:20
payment system uh at virtually every
00:28:23
level has has changed significantly
00:28:26
um what does your framework tell us
00:28:28
about things like uh the efforts to have
00:28:32
more public payment options uh or or to
00:28:37
um you know to force uh the you know
00:28:40
private sector to give up its
00:28:42
intellectual property to be
00:28:45
um developed by by the public sector the
00:28:47
great example of that of course is is
00:28:49
Brazil
00:28:50
um uh and other efforts are underway
00:28:53
um does it have anything to say about
00:28:54
that have you does it do you do you say
00:28:56
do you think yes uh given the uh the um
00:29:00
the tensions that we see between
00:29:02
concentration and stability that we
00:29:04
should see more public ownership and
00:29:07
provision of payment rails less of it or
00:29:09
is that an orthogonal discussion it's
00:29:12
not an orthogonal discussion um
00:29:18
foreign
00:29:22
I don't think it's an easy question so
00:29:25
my concern certain with full government
00:29:27
control or if you're going all the way
00:29:29
towards what you were talking about is
00:29:32
um
00:29:35
in some context central banks have been
00:29:38
good about innovating in another context
00:29:41
I might say domestically they have not
00:29:44
been as good at that and so
00:29:47
um
00:29:48
to the extent that there are entities
00:29:50
with some profit motive that have a
00:29:52
threat of competition there are some
00:29:55
benefits to Innovation but I at least
00:29:56
think
00:29:58
I think that
00:30:02
more government control it it shouldn't
00:30:06
be surprising that that China and Brazil
00:30:08
acted the way that they did
00:30:10
um I think given that that free the way
00:30:13
that I think of payments in in this
00:30:15
framework that um
00:30:17
you have a trade-off between stability
00:30:23
and Innovation and safety and
00:30:27
it requires an enormous amount of
00:30:29
administrative oversight to make sure
00:30:30
that a privately run system doesn't
00:30:32
abuse take advantage of that upon one
00:30:34
metric which might be a situation in
00:30:37
which public control is is helpful
00:30:39
um but I'm cautious about that because I
00:30:42
don't
00:30:43
feel all that that confident I agree
00:30:45
with
00:30:46
all of the premises and and I want to um
00:30:50
it's not a conclusion I feel I I am
00:30:53
completely comfortable reaching at this
00:30:55
point so not to dodge the question but I
00:30:57
think sort of uh in many respects it
00:31:00
makes sense I think uh but but that
00:31:02
whether it's normatively good or bad
00:31:04
depends upon a lot of assumptions about
00:31:05
State capacity uh both to supervise
00:31:08
private systems and to to manage the
00:31:11
public system
00:31:13
okay
00:31:18
let's take the question then from Anna
00:31:21
um honor galpern from Georgetown writes
00:31:23
one note on your trilemma conundrum
00:31:26
investment and Innovation are means not
00:31:28
goals investment in what for what
00:31:30
Innovation for innovation's sake ditto
00:31:33
for competition it's not good in itself
00:31:35
and she wonders whether you are over
00:31:37
investing in the mechanics at the risk
00:31:39
of missing the elephant in the room
00:31:40
which is the US dollar which amounts for
00:31:42
much of the fed's position and I would
00:31:43
add of course that's uh 70 of the global
00:31:46
economy is dollarized directly or
00:31:49
indirectly indirectly the famous saying
00:31:52
from from John Connolly uh Richard
00:31:54
Nixon's Secretary of Treasury when the
00:31:57
gold window was slammed shut is the
00:31:59
dollar is our currency but he said Tower
00:32:02
Partners your problem so if that's the
00:32:05
case if the US dollar is the American
00:32:07
currency but a global problem then isn't
00:32:10
all of this about dollar dominance in in
00:32:13
places where we don't have an
00:32:14
international or Reserve or Regional
00:32:16
Reserve currency
00:32:17
um is this does this trilemma just sort
00:32:20
of melt away yeah this is a super
00:32:22
interesting question I think um
00:32:25
again a lot of the the I think the the
00:32:28
dilemmas are most evident in the
00:32:30
cross-border context and one of the
00:32:31
things on this question is getting it I
00:32:33
think is one of the biggest
00:32:35
um
00:32:36
uh reasons that cross-border issue is
00:32:40
not bigger than it currently is is
00:32:41
because such a high percentage of
00:32:43
transactions can occur on fedwire
00:32:45
because the dollar has such a strong
00:32:47
position
00:32:49
um and so I guess I think
00:32:53
I I don't I think it's probably
00:32:55
certainly worth acknowledging that I I
00:32:56
think of the the US Dollars position as
00:32:59
arguably
00:33:01
um
00:33:02
at least in the payments context
00:33:04
reducing some of the issues because it
00:33:07
allows essentially interoperability by
00:33:09
having everyone opt to use dollars
00:33:12
um but I I still think
00:33:14
um
00:33:16
and and Innovation uh you're I agree
00:33:18
with how on a on a phrase the question I
00:33:21
do think and so maybe I need to rethink
00:33:23
how I phrase this the many Payment
00:33:26
Systems today especially across border
00:33:29
and U.S systems are not as fast or
00:33:31
reliable as they maybe should be and so
00:33:35
those are the types of Investments that
00:33:38
I I think
00:33:40
um
00:33:41
uh reflect this but you're right we it's
00:33:44
not that you want Innovation it's that
00:33:45
when a system could be better either
00:33:48
more reliable or faster you want
00:33:49
Innovation to to get there in a safe and
00:33:51
reliable way
00:33:53
um but I don't I think you're right to
00:33:54
point out that Innovation for
00:33:55
innovation's sake is the wrong way to
00:33:57
think about it
00:34:03
so one interesting Dimension that comes
00:34:07
out of your paper you didn't talk about
00:34:09
it that much in your presentation
00:34:12
is the role of the Central Bank and uh
00:34:16
thing that everyone is discussing right
00:34:18
now the Central Bank digital currency
00:34:22
um and I I wonder if you can elaborate
00:34:24
on this a little more because there is
00:34:27
certainly a good amount of skepticism
00:34:29
out there that this is going to be uh
00:34:32
the the arrangement of the future yet I
00:34:35
think that you you certainly see it as
00:34:37
part of the equilibrium
00:34:39
yeah I
00:34:45
um
00:34:46
I I should have been prepared for this
00:34:49
question because it's the obvious
00:34:50
question uh to ask because you know
00:34:53
everyone can say oh a CBD CD Central
00:34:56
Bank digital currency would be great and
00:34:58
yet
00:34:59
um
00:35:01
I
00:35:03
I'm not convinced the the rollout has
00:35:07
been it is going to be successful
00:35:08
whether it will occur at all I I it
00:35:11
doesn't seem to um
00:35:14
uh you know I know the FED just released
00:35:16
a report on the pros and cons of a U.S
00:35:19
Central Bank digital currency I guess
00:35:21
when I think of it I think of it as a as
00:35:22
I guess what I thought when I wrote that
00:35:26
I thought of it as almost a metaphor for
00:35:28
we need more
00:35:31
to the extent we want better Payment
00:35:32
Systems we need more involvement from
00:35:35
the central bank I I don't think a CBD
00:35:38
the Central Bank digital currency is
00:35:40
necessarily I I
00:35:42
this I'm really going to dodge because I
00:35:44
just don't think that Aina uh Central
00:35:47
Bank digital currency is there's
00:35:49
evidence that in the US it's fixing our
00:35:51
payments problems and so I I think I
00:35:53
need uh should be careful about what I
00:35:56
say there it's it's uh
00:35:58
if if we could snap our fingers and have
00:36:01
one tomorrow it would be maybe helpful
00:36:02
on the margins but I don't even think it
00:36:04
would solve everything I I mentioned at
00:36:06
the beginning all right well now we're
00:36:08
going to enter the stage of the webinar
00:36:10
where we uh turn the fire up and we
00:36:12
don't let you pull your feet away from
00:36:13
it so we'll see if we can uh we can get
00:36:15
you to
00:36:16
um to uh to be Concrete in in these in
00:36:20
this context so you and Dan already have
00:36:23
written a couple of articles that are
00:36:26
um focused on on a different part of
00:36:29
this of this kind of issue about
00:36:31
payments infrastructure uh and and about
00:36:35
the both the public and private aspects
00:36:38
of it the centralization questions and
00:36:40
so I want to bring those those
00:36:43
um uh contributions into dialogue here
00:36:45
so I'm thinking here about dtcc and so
00:36:48
in the Securities and capital markets
00:36:50
infrastructure context and then also a
00:36:53
newer piece on plaid so thinking about
00:36:55
this as it refers to open Banking and I
00:36:58
think that there's a version of these
00:37:00
ideas and we can um uh you know uh post
00:37:03
uh to I think there's a way for us to
00:37:06
post attendees the links to those papers
00:37:07
which I'll try to do in just a second
00:37:10
um
00:37:10
but I want you to think through the
00:37:12
policy implications For What You observe
00:37:15
about payments infrastructure and
00:37:17
financial infrastructure everywhere
00:37:20
and that is uh in in thinking about uh
00:37:24
what do we learn about the way we are uh
00:37:28
doing less well than we could do but for
00:37:31
specific policy interventions with
00:37:34
respect to financial infrastructure and
00:37:37
I'm going to give you three examples I
00:37:38
want you to respond just just to tell if
00:37:41
you had either uh the the Congress
00:37:44
institutional in front of you or the
00:37:46
white house or the central bank or the
00:37:48
SEC and you could say do this or stop
00:37:52
doing that it's kind of in a rapid fire
00:37:53
way and here are the three the questions
00:37:56
that I'd ask you to to comment on the
00:37:58
first is are we today in the question of
00:38:02
uh of uh clearing on on stock uh trades
00:38:07
especially where we might be is the dtcc
00:38:10
model which is bank owned or sorry
00:38:13
broker owned is that model which evolves
00:38:16
it through you know and most of what
00:38:17
I've learned about this I've learned
00:38:18
from you and Dan data through a very
00:38:21
specific path dependence but it is where
00:38:23
we are is is that where we could be are
00:38:26
there efficiency gains or Equity gains
00:38:28
or fairness gains that we could get uh
00:38:31
with a specific policy uh introduction
00:38:33
or is this just kind of the least bad
00:38:37
set of parameters that we already have
00:38:39
so the first weekend is on stock trades
00:38:41
and the capital markets is this dttc yep
00:38:44
dtcc model uh Centric model the best the
00:38:47
second is in fintech Innovation the very
00:38:51
fact that we're getting these upstarts
00:38:53
the Plaid is the example new site that
00:38:56
Visa tried to buy and the Trump doj
00:38:58
prevented them from doing so does that
00:39:00
represent uh something that policy
00:39:03
makers thinking about your framework or
00:39:05
not should encourage or discourage right
00:39:08
is there some policy uh intervention
00:39:10
that we want to see and the third is is
00:39:13
right here in in your current paper and
00:39:15
that is thinking about the status quo
00:39:17
with respect to retail cards words so
00:39:20
just thinking Visa Mastercard American
00:39:22
Express on the credit side are there
00:39:25
changes that you would want to see made
00:39:28
that would put us in a better Frontier
00:39:30
however you define that so Capital
00:39:32
markets open banking cards
00:39:35
the first two I won't Dodge at all
00:39:37
um uh the second third uh we'll see um
00:39:42
dtcc you know I think Dan and I wrote
00:39:44
this paper and a lot of people so so the
00:39:47
thesis of the paper is
00:39:49
um there was an attempt by
00:39:53
really Congress but mandated the SEC to
00:39:56
have interoperability requirements such
00:39:58
that nscc and DTC
00:40:01
would be required to interoperate with
00:40:05
regional competitors the Pacific
00:40:06
Clearing Corporation the Securities
00:40:08
Clearing Corporation of Philadelphia and
00:40:10
the idea in Congress was very explicit
00:40:11
about this was to mandate was to
00:40:14
preserve competition and clearing and
00:40:16
depository markets and what what we
00:40:19
argue our thesis is that the
00:40:21
interoperability agreements were in many
00:40:23
respects the means by which uh a single
00:40:27
depository in a single clearing
00:40:28
Securities Clearinghouse obtains their
00:40:30
monopolies and the reason for that is
00:40:32
the interfaces themselves involved fixed
00:40:36
costs though by Statute nscc was
00:40:39
required to Bear those costs so more
00:40:41
importantly
00:40:43
um
00:40:44
the interfaces allowed nscc to dictate
00:40:48
the pace of innovation as our argument
00:40:49
in that um when nscc said we want to be
00:40:52
faster the regional guys had to do the
00:40:54
same and they couldn't afford to keep up
00:40:56
with those Investments and the second
00:40:58
point is that it reduced and maybe
00:41:01
eliminated altogether product
00:41:02
differentiation the nature of the market
00:41:04
really meant that
00:41:07
the Pacific Clearing Corporation just
00:41:09
had to say we'll have a variety of ways
00:41:12
of communicating with nscc but we're
00:41:13
really just using an SCC system and so
00:41:16
given that market system it doesn't
00:41:18
really make sense to have competition
00:41:20
and so people some people not everyone
00:41:22
hopefully rather than said oh we need to
00:41:25
do all these reforms to nscc because
00:41:27
it's poorly designed and I don't think
00:41:29
that's the right response I think it's
00:41:31
an interesting history and a
00:41:35
maybe in some respects a cautionary tale
00:41:38
about how interoperability can work in
00:41:41
certain highly unusual bespoke
00:41:43
cardiosyncratic circumstances but I
00:41:45
think I don't I you know this goes back
00:41:48
to Anna's question it's not clear to me
00:41:50
what
00:41:51
there were I think there were moments in
00:41:53
the early 2000s when there was a
00:41:54
possibility that
00:41:56
um because the New York Stock Exchange
00:41:58
and and the American Stock Exchange were
00:42:00
primary owners of of
00:42:03
nscc that there was a possibility of
00:42:07
um Arrangements that benefited them but
00:42:09
since then we've reformed governance and
00:42:12
I don't know that nscc is all that bad
00:42:16
so I I I don't think I would want it
00:42:19
it's not clear that we would want
00:42:21
all that much to be different in in that
00:42:24
context I'm open to the possibility it's
00:42:26
more the the story that I find
00:42:28
interesting
00:42:29
um this goes back you know I'm uh maybe
00:42:31
a better uh I don't know my political
00:42:34
instincts would be all that good I like
00:42:35
to understand things but not not
00:42:36
necessarily like talk to policy makers
00:42:40
um
00:42:41
in fintech Innovation I think
00:42:44
so the question could be should we have
00:42:46
allowed visa to buy plaid that's a
00:42:48
really hard question but but but you can
00:42:50
also think of it as just
00:42:52
um
00:42:53
we have significant Innovation right now
00:42:57
in card services and and and and and and
00:43:00
largely because of sort of how of apis
00:43:04
and
00:43:06
this is you know this has implications
00:43:09
for open banking but what what
00:43:11
um
00:43:12
Dan and I are trying to think through is
00:43:15
is what are the
00:43:17
trade-offs involved here and are what we
00:43:19
we sort of posit is that
00:43:23
um apis to connect banks are themselves
00:43:26
likely to be a natural monopoly and we
00:43:28
see evidence of this with plaid though
00:43:30
uh having such a large market share
00:43:33
though the possibility that um
00:43:36
uh
00:43:38
you there might be some pushback against
00:43:40
that even so I I would think that if
00:43:43
something replay you know from Visa's
00:43:45
perspective I can understand why plaid
00:43:47
seems like an existential threat we need
00:43:49
one
00:43:51
sort of plaid and and
00:43:55
I don't think I can predict at this
00:43:58
point if Visa had planned to acquire
00:44:00
plaid to kill it I think uh that would
00:44:03
have been a problem I'm not sure that's
00:44:04
what was would have happened if Visa
00:44:07
said this is the future of you know Card
00:44:12
Services may be a thing of the past or
00:44:14
more you know possibly
00:44:16
um we are going to be completely at the
00:44:19
mercy of plaid and we'd rather build
00:44:21
that out uh I don't know that that seems
00:44:24
like a situation in which there might
00:44:26
have been it might have been okay and I
00:44:27
I think I don't know how Regulators
00:44:29
should have handled that I think the
00:44:30
issue is that
00:44:32
um plaid has real scale economies that
00:44:36
that are understandably a threat to visa
00:44:38
and and and so from an Anti-Trust
00:44:41
perspective I think
00:44:43
um I don't think it's an an easy case
00:44:46
but I think the trade-off is clear which
00:44:47
is that you want a company it may simply
00:44:51
be that there's one and then you're
00:44:52
concerned both about plaid moving into
00:44:55
related markets other abuses of of a
00:44:58
dominant position and that just returns
00:45:00
us to the same situation uh we're in in
00:45:03
payments today
00:45:05
um the third question was what was the
00:45:08
third question
00:45:11
is um the one that we're thinking about
00:45:13
right now oh I was thinking about the
00:45:15
context for cards so
00:45:17
um what what do we do in um so I'm
00:45:19
moving it through your three papers the
00:45:20
two of the Dan and here yeah
00:45:22
um and on this one I want you to apply
00:45:24
it to uh retail credit so uh do the card
00:45:30
networks are we at an optimized Frontier
00:45:32
from a policy perspective do we need to
00:45:34
break them up do we need to have a
00:45:37
public option as it should be fee
00:45:39
regulation or fee caps I mean how how or
00:45:42
or are we like with dtcc we're uh we're
00:45:45
at the the way we've evolved this place
00:45:48
still permits for all the kinds of
00:45:50
innovation
00:45:51
um without instability
00:45:53
um at the at the periphery and that the
00:45:55
incumbents are still uh well optimized
00:45:58
what's your take on that
00:46:00
um
00:46:01
I think cards are hard for
00:46:04
a couple reasons one
00:46:07
um
00:46:07
you know that
00:46:09
various Merchants reluctance to take
00:46:11
American Express because of higher fees
00:46:14
seems to suggest or uh that that
00:46:18
um there are
00:46:20
Network effects and scale economies
00:46:23
I think that there are you know it's a
00:46:26
highly concentrated market and you have
00:46:27
concern about high fees there is much
00:46:31
more competition
00:46:33
for credit cards as PayPal and Pla and
00:46:37
venmo have have emerged such that um
00:46:41
I think five years ago I think
00:46:44
uh supervision of fees might have been
00:46:46
very important I think it's becoming
00:46:48
less important as the the market
00:46:49
develops
00:46:51
um I wouldn't break them up
00:46:57
one one interesting Dimension that comes
00:47:01
out of your paper is uh I would say
00:47:04
related to a firm like Facebook and the
00:47:07
possibility that Facebook will develop
00:47:08
its own currency
00:47:10
and as you mentioned on the one hand
00:47:12
this is good for competition on the
00:47:14
other hand uh when you think about
00:47:16
financial stability
00:47:18
if you want to maintain stability it
00:47:21
implies that the FED will have to expand
00:47:22
its regulatory perimeter and start
00:47:26
dealing with firms that are not purely
00:47:28
financial institutions that's another
00:47:30
thing I was looking for you to expand on
00:47:33
a little more so so is the issue here
00:47:36
just the fact that these are not
00:47:38
financial institutions or are you
00:47:40
worried about expanding the regulatory
00:47:42
perimeter more uh more broadly than that
00:47:45
I mean we're dealing with such questions
00:47:47
all the time as you know Banks
00:47:50
activities are moving into non-banks and
00:47:52
the FED is constantly debating how much
00:47:54
uh of the previous regulations and uh uh
00:47:59
you know assistance should apply to
00:48:00
these institutions uh and the question
00:48:02
is how do you see it in this context
00:48:04
my concern is expanding the bank
00:48:06
regulatory perimeter now
00:48:09
if if
00:48:10
um
00:48:12
if you have genuine real-time payments
00:48:15
then it's less of a concern because
00:48:16
you're not holding you're not either the
00:48:18
counterparty credit risk is lower but my
00:48:20
my concern is that is is you know in
00:48:23
some ways there are no new problems in
00:48:24
finances like this is all we learn from
00:48:27
crypto is is that we keep discovering
00:48:30
the the the financial issues that that
00:48:33
people who study Financial regulation
00:48:35
have thought about for 50 years and with
00:48:38
Facebook it seems you know like a
00:48:41
classic case of a firm that might try to
00:48:46
offer cheaper and may offer you know in
00:48:48
some senses faster services or something
00:48:51
like that but will then become a source
00:48:54
of of stability concerns and so in if it
00:48:59
turns out that something goes wrong it
00:49:01
seems inevitable that Facebook would get
00:49:03
support from uh you know in this world I
00:49:06
guess is it meta now or something
00:49:08
um uh uh and and so it's the there's
00:49:12
nothing new Under the Sun or or in this
00:49:14
context I think and and the concern you
00:49:17
know it's entirely possible and if you
00:49:19
think I am missing something please let
00:49:20
me know but my concern is just the
00:49:22
oldest one which is that we have some
00:49:24
entity that operates outside the the the
00:49:28
the the
00:49:29
Bank regulatory perimeter doing
00:49:32
engaging in services that uh compete
00:49:35
that do the same things and are
00:49:37
precisely the reasons we have a bank
00:49:39
regulatory perimeter and so if things do
00:49:41
go wrong I worry about
00:49:44
um uh and you know this this this leads
00:49:46
to sort of interesting like in modern
00:49:50
thought scenarios such as
00:49:53
um
00:49:53
would the FED be subsidizing certain
00:49:56
types of social media companies because
00:49:58
there would be an implicit uh uh subsidy
00:50:01
in the event that something went wrong
00:50:03
which is just sort of fun to think about
00:50:04
that I don't know if it's related to uh
00:50:07
Financial concerns beyond the the
00:50:08
original one of extending
00:50:11
um uh uh government support
00:50:15
Josh I want to pull in your expertise
00:50:17
from another of your field domains and
00:50:20
that's bankruptcy
00:50:22
how do we think about
00:50:24
um
00:50:25
payments inference infrastructure
00:50:27
distress and resolution
00:50:30
so the way that the law thinks about it
00:50:32
is that you know these are companies and
00:50:35
if they go bankrupt they'll be subject
00:50:36
to the bankruptcy code there are
00:50:38
exemptions for certain kinds of
00:50:39
financial contracts mostly not relevant
00:50:41
here
00:50:42
um unless you are uh deemed to be uh
00:50:47
significant uh Financial Market
00:50:51
infrastructure uh systemically important
00:50:54
so Sif moves systemically important
00:50:56
Financial Market utilities
00:50:59
um in which case you'd go through a
00:51:01
specialized process outlined in
00:51:02
Dodd-Frank regulated by the FED but
00:51:06
um most of the kinds of payments
00:51:07
infrastructure we're talking about is
00:51:09
not so designated and so should we think
00:51:12
about resolution and distress for venmo
00:51:16
or PayPal for example differently than
00:51:19
we would think about the you know the
00:51:21
distress of uh of you know General Mills
00:51:25
or or Twitter uh or or Tesla
00:51:29
um
00:51:30
resolution of payments infrastructure in
00:51:32
a different domain and more like we do
00:51:35
for example in thinking about energy
00:51:38
infrastructure or or systemically
00:51:40
important financial institutions or
00:51:42
things like that
00:51:45
um
00:51:48
this is why I think it's risky that
00:51:52
people leave funds and PayPal and Dan's
00:51:54
written about the you know the issue the
00:51:56
ordinary bankruptcy processes just
00:51:58
follows absolute priority Rule and
00:52:00
unsecured creditors are paid after
00:52:02
everyone except shareholders and so the
00:52:04
the problem we're worried about if if a
00:52:09
non-sif you know uh designated entity
00:52:13
becomes insolvent is that people who've
00:52:16
left who have left funds in PayPal uh
00:52:19
will probably be wiped out
00:52:22
um and
00:52:25
if people don't leave if if if people
00:52:30
leave money in a retail payments
00:52:32
provider such that it seems to look like
00:52:34
a bank uh this could become highly
00:52:37
problematic now
00:52:39
um
00:52:42
what
00:52:44
they're they're I I think there are two
00:52:47
interesting Parts about how we resolve
00:52:49
Financial Market utilities that are
00:52:51
relevant to this the first is that it's
00:52:54
basically a license to at the margins
00:52:57
play around with absolute priority rule
00:52:59
right you can pay some people who would
00:53:01
be paid after others before other people
00:53:03
this might give rise to moral hazard
00:53:05
issues but it's important for preserving
00:53:07
stability the other is that there's
00:53:09
greater possibility of of of of of
00:53:13
assistance from the government to make
00:53:17
people whole now they're we can quibble
00:53:19
about the legality of that but I'll just
00:53:21
take a like legal realistic approach for
00:53:23
a second and think we're likely to see
00:53:25
government support if if this happens
00:53:26
and well I guess maybe with GM and
00:53:29
Chrysler bankruptcy is no different but
00:53:31
like assuming that that that's not the
00:53:33
case for a second uh
00:53:36
um and so I I think you know the the
00:53:39
insolvency risk of
00:53:42
a payment system outside of the
00:53:44
regulatory perimeter highlights many of
00:53:47
the dangers that um
00:53:49
you know if people don't know about it I
00:53:51
think when if Twitter goes bankrupt
00:53:54
um people's livelihoods are not at stake
00:53:57
now in some sense if you leave your
00:53:58
money in PayPal you are on notice in
00:54:00
that PayPal's terms of service are very
00:54:02
very clear about the risks you run but I
00:54:05
don't think anyone who uses PayPal
00:54:06
thinks of it that way and so I think
00:54:09
it's paternalistic but I think
00:54:12
um uh there is
00:54:14
if if if to the extent that PayPal or or
00:54:18
venmo
00:54:20
um is a significant store of people's
00:54:23
assets I think we need to to figure out
00:54:27
how to deal with this
00:54:29
um but the right approach is also
00:54:31
complicated I mean one approach is just
00:54:33
to say people can't leave money and you
00:54:34
know PayPal can't be a bank when people
00:54:36
leave money in it that's a problem and
00:54:38
it's a problem for precisely this reason
00:54:40
I'm
00:54:41
reluctant in the absence of of treating
00:54:44
PayPal as a bank for the the in a sort
00:54:47
of micro potential sense that it would
00:54:48
be subject to Prudential regulations and
00:54:51
capital requirements and and and all of
00:54:54
the sort of whole gamut of things to
00:54:56
just say
00:54:58
um will support PayPal but I don't think
00:55:00
that
00:55:02
um
00:55:03
we should let out so I think we need to
00:55:06
address this ex-ante at an earlier point
00:55:08
in time than when PayPal is insolvent
00:55:10
because otherwise I don't you know it
00:55:13
seems like it becomes a political
00:55:14
question of of
00:55:15
um whether we should just in some
00:55:18
respects bail out PayPal by paying you
00:55:21
know presumably if this goes wrong
00:55:24
um the payment provider that is
00:55:25
insolvent has taken risks with funds
00:55:28
stored in PayPal or venmo or whatever
00:55:30
and those those those
00:55:32
risks turned out poorly which is why the
00:55:36
The Entity can't pay and if that's
00:55:38
happening it we should probably think of
00:55:40
them as banks in a sense that they're
00:55:42
like taking deposits and doing stuff
00:55:44
with those deposits whether it's lending
00:55:46
or investing um and so I think we should
00:55:49
these are issues and and that that we we
00:55:52
we should probably think about uh before
00:55:55
this happens because it seems you know
00:55:58
whether a bankruptcy like this is a
00:56:00
source of
00:56:01
large systemic risk it would almost
00:56:04
certainly uh harm the livelihood of
00:56:06
people who who may uh be adversely
00:56:09
affected in a way that seems preventable
00:56:12
and so the ways to deal with that seem
00:56:15
to be you can't store funds here or you
00:56:19
have to
00:56:20
um be very very careful you know you
00:56:22
could treat it like a money market
00:56:23
mutual fund or something such that
00:56:24
you're careful about the types of
00:56:26
activities that that payment systems are
00:56:30
engaged in
00:56:32
um
00:56:34
so I think we I guess I think we
00:56:36
probably know how to think about that
00:56:38
but I I mean do you think there are
00:56:40
separate insolvency issues that are
00:56:42
separate from the ones I just talked
00:56:43
about
00:56:44
no I don't I don't think so I think it
00:56:46
is a question of there's there's a
00:56:49
political economy around insolvency when
00:56:51
you're talking about access to money
00:56:52
that becomes extremely bank-like in
00:56:55
their and their uh and their policy so
00:56:57
so venmo presents I think a very
00:56:59
troubling uh example of this in a way
00:57:02
that other payments infrastructure would
00:57:04
not but a Visa went down or a MasterCard
00:57:07
went down
00:57:09
um you know what that would mean in
00:57:11
terms of the ability of the economy to
00:57:13
run
00:57:15
um suggest a kind of political reaction
00:57:17
that sounds he made a joke about GM and
00:57:19
Chrysler but that's exactly the issue
00:57:20
right is that but it's different rather
00:57:22
than having a major constituency of
00:57:25
employees and counterparties and uh and
00:57:29
and others who are demanding political
00:57:30
action we would have a sense of if we
00:57:33
cannot sustain this uh this thing that
00:57:37
has such a public face to it then the
00:57:39
crisis is going to become panic in a
00:57:43
self-fulfilling way and so there lies
00:57:45
the political intervention that's a form
00:57:47
of implicit subsidy and and that makes
00:57:50
you think okay you should price it and
00:57:52
impose it on
00:57:54
um on the institution that is so um that
00:57:56
benefits in that way or you should say
00:58:00
no such subsidy
00:58:02
um we would handle this in different
00:58:03
ways and then that makes me think that
00:58:05
there should be some sort in the same
00:58:06
way that we require
00:58:08
um Banks to have contingent uh funding
00:58:11
plans as part of their their examination
00:58:13
cycle
00:58:14
um maybe we should have something like
00:58:16
that but facing the government so if
00:58:18
we're not if we're not going to say that
00:58:20
we're going to guarantee basic payments
00:58:21
infrastructure in a panic and what are
00:58:24
we saying instead and I think that's the
00:58:25
way I would think about it but I'm not
00:58:27
sure how much I would say I would want
00:58:29
bankruptcy code exceptions to be written
00:58:31
to have like a the equivalent of a title
00:58:34
to a Dodd-Frank process uh as a as an
00:58:38
analog to bankruptcy or is a uh you know
00:58:40
bankruptcy fails than this
00:58:43
um I don't know that's that's kind of
00:58:44
the way I would think about it yeah and
00:58:46
I think you're getting it two issues
00:58:48
that are somewhat distinct the first is
00:58:50
just um to what extent does this look
00:58:52
like Banking and the other is
00:58:55
um
00:58:56
to what extent is this just extremely
00:58:58
important in some sense that we're going
00:59:00
to force reorganization instead of
00:59:03
liquidation I mean with GM and Chrysler
00:59:05
there was a real possibility of
00:59:06
liquidation and that was the it wasn't
00:59:08
that bankruptcy it was impossible it was
00:59:10
that you had to you know the the
00:59:12
government felt political pressure to to
00:59:14
help labor jump the line and I think
00:59:18
that analogy to
00:59:20
courage is is apt
00:59:23
um but the ordinary bankruptcy process
00:59:25
you might and you might have a subsidy
00:59:27
but it doesn't mean ordinary bankruptcy
00:59:29
as uh not pot you can declare bankruptcy
00:59:33
reorganize you still have payments there
00:59:34
should be no disruption to activity you
00:59:36
just may need help with funding for some
00:59:39
period of time
00:59:40
um and I think that's different than
00:59:42
when people stand to lose money that
00:59:46
they've left in a in a payment system
00:59:49
okay
00:59:51
fascinating issues I think we came to
00:59:54
the top of the hour
00:59:55
we could probably continue to talk about
00:59:57
it for a long time but this is a time to
01:00:00
end so thank you very much Josh it was a
01:00:03
pleasure to read the paper and talk to
01:00:05
you about it and I hope that the
01:00:07
audience Uh current and future will
01:00:09
benefit from it as well
01:00:11
it was really uh fun to talk to you all
01:00:14
and I uh thanks for having me
01:00:17
thanks Josh and thanks everyone
